TTM Technologies, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. TTM manufactures printed circuit boards (PCBs), substrates and backplane assemblies, operating across Asia Pacific and North America. The filing reports annual results; fourth-quarter revenue was $381.7 million.
Key financial results
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $1,348.7 million | $1,428.6 million |
| Gross profit / gross margin | $225.0 million / 16.7% | $301.3 million / 21.1% |
| Operating income (loss) | ($142.0 million) | $91.1 million |
| Net income (loss) attributable to TTM shareholders | ($174.6 million); diluted EPS ($2.13) | $41.9 million; diluted EPS $0.51 |
| Cash provided by operating activities | $182.6 million | $179.3 million |
| Cash and cash equivalents at year-end | $285.4 million | $196.1 million |
| Working capital at year-end | $395.7 million | $234.4 million |
| Total debt at year-end, approximately | $575.0 million | $513.3 million |
- Sales fell 5.6% year over year. Asia Pacific sales declined 2.7% and North America sales declined 10.0%.
- Cash purchases of property, plant and equipment and equipment deposits were $139.6 million. Separately, segment reporting shows capital expenditures of $160.6 million.
- Debt comprised $400.0 million of bank borrowings and $175.0 million principal amount of convertible notes. The new credit facility had $60.0 million of unused revolving capacity at year-end.
Material changes and unusual items
- Gross margin contracted 4.4 percentage points, primarily due to increased China labor costs, higher depreciation, lower production and fixed-cost absorption, and $10.9 million of costs associated with the temporary closure of the SYE facility.
- TTM recorded $200.3 million of goodwill and definite-lived intangible impairment in Asia Pacific, plus $18.1 million of long-lived asset impairment. The charges followed weaker operating performance, softer demand and reduced expectations for cash flows. The remaining Asia Pacific goodwill was $12.1 million; management reported limited valuation headroom in its year-end test.
- The company reported a $5.5 million loss on extinguishment of debt following its September 2012 refinancing. The new facility includes a $370 million term loan, a $90 million revolving facility and an $80 million letter-of-credit facility; the term loan and letter-of-credit facility mature in September 2016.
- Asia Pacific operating segment income (loss), which includes the impairment charges, was ($165.2 million), compared with $63.0 million in 2011. North America segment income was $37.8 million, down from $45.4 million.
Liquidity, outlook and principal risks
- Management said cash, internally generated funds and available borrowing capacity should meet anticipated capital spending, debt service and working-capital needs for the next 12 months. It planned approximately $100 million of 2013 capital expenditures, about $83 million in Asia Pacific, focused on capacity, advanced technology, environmental compliance and equipment replacement.
- Management expected China wage increases to continue in 2013 and potentially pressure Asia Pacific margins further. The filing cites a 2%–4% forecast for worldwide PCB industry revenue growth in 2013; this is an industry estimate, not company revenue guidance.
- Demand weakness in networking/communications and computing affected Asia Pacific; telecommunications infrastructure spending and uncertainty about U.S. defense spending weighed on North America. TTM also faces customer concentration: Apple represented 14% of 2012 sales, and the five largest OEM customers accounted for 33%.
- Other stated risks include substantial indebtedness and floating-rate exposure, credit and order-cancellation risk, intense pricing competition, China labor and utility constraints, raw-material costs, foreign-exchange and regulatory risks, and environmental compliance. Approximately 54% of debt was floating-rate; the filing estimates a 1 percentage-point rate increase would raise annual interest cost by $3.1 million.
- At year-end, TTM was in compliance with credit covenants. Legal matters and environmental remediation were not considered material by management; the recorded environmental liability was approximately $0.5 million. Management reported effective disclosure controls and internal control over financial reporting.
- After year-end, TTM signed a letter of intent to sell its majority interest in SYE and acquire the minority interest in DMC, both in Dongguan, China. The transaction was expected to close by the end of the second quarter of 2013, subject to stated valuation conditions.
Most important facts for investors to verify
- Whether operating performance and cash flows in Asia Pacific recover, and whether further impairment of the remaining goodwill is required.
- Whether wage costs, utilization and the facility closure continue to weigh on margins, and whether planned capital spending earns adequate returns.
- Debt repayment capacity, covenant headroom, refinancing needs and sensitivity to interest rates; the $175 million convertible notes mature in May 2015.
- Whether major-customer demand and concentration, particularly Apple and networking/communications exposure, change materially.
- Completion, valuation and operating effects of the proposed SYE/DMC ownership transaction.